Businesses and consumers alike are drawn to the convenience and flexibility offered by ‘as a Service’ companies, including companies which operate within the fields of mobility, equipment, or infrastructure like solar panels. For such companies, fast growth and scaling is often coupled with the need to invest in equipment, boosting demand for capital market solutions.
Amid the transformative forces of digitalisation, ‘as a service’ companies represent one rapidly growing segment. Such companies offer an alternative to ownership or leasing. Similar to the monthly payment subscription models pioneered by software companies, Anything as a Service (XaaS, a catch-all term) companies offer customers the opportunity to receive new equipment, use a car or scooter, install solar panels, and so much more – all paid for via a fixed monthly rental or flexible pay-per-use model.
Reports from market analysis firms are projecting continued strong growth for the sector, in areas such as equipment as a service (EaaS), mobility as a service (MaaS), and devices as a service (DaaS), but why are XaaS companies growing so fast?
One key aspect is convenience. For consumers, XaaS provides the opportunity to get the newest phone or device in their pocket without paying large upfront costs, whether that’s because they find it fashionable to change their phone every six months according to the latest product launch, or because they only anticipate needing it for a limited period of time.
In the transportation sector, mobility as a service offers cars or e-scooters on demand, typically with a pay-as-you-go model. For consumers who have lower usage demands, this allows them to avoid the high fixed costs associated with the outright ownership of a car, for example.
Businesses see similar benefits, although often on a different scale. In the mobility space, on-demand vehicles can be an alternative to the traditional company car fleet leasing model.
In the industrial space, equipment-as-a-service (EaaS) is increasingly being offered by original equipment manufacturers (OEMs). This can allow an industrial company to make a big leap in terms of productivity by adopting new machines and even processes, without impacting its balance sheet or increasing its debt load.
A service model will ideally have benefits for both parties: the machines may be supplied on an overall equipment effectiveness (OEE) basis, meaning that the provider is responsible for ensuring that a machine operates without interruption, such as by carrying out preventative maintenance to reduce the chances of unplanned downtime, with any disruptions reducing the charge to the end user.
From the perspective of OEMs, subscription models play to the trend of companies striving to lock in more and more recurring service and maintenance revenue. In advanced iterations, EaaS companies can even provide planning tools or consultancy services, creating additional revenue streams for sophisticated operators.
With the COVID-19 pandemic generally seen as having accelerated trends around digitisation, it has also played a role in the rapid growth of XaaS, especially for devices as a service (DaaS) companies. The shift to remote working has led to a spike in demand for equipment including laptops and mobile phones. As well as reducing capital expenditure, businesses using DaaS can benefit from additional services such as installing software, ensuring that device security is kept up to date, the replacement of faulty devices, and the provision of insurance, streamlining their processes.
XaaS can also have an impact in the field of sustainability. This includes indirect benefits – newer equipment is often less energy intensive – it can also allow consumers or businesses to upgrade to climate-friendly infrastructure like solar panels or a new heating system, without being saddled with the capital costs.
One example of a sustainability-focused company is Enpal, which offers solar-as-a-service. This innovative Berlin-based company keeps costs low by using imaging technology and artificial intelligence to plan installations. It supplies panels to homes or businesses for a fixed monthly rental cost. In September 2021, the company announced that it had raised €345m in debt financing, to be used to refinance more than 15,000 photovoltaic systems, freeing up capital in order to continue to expand.
The XaaS approach can also bring other climate benefits. Mobility solutions can reduce the number of cars on a city’s streets, or increase the adoption of low-emission transport solutions such as e-bikes. DaaS providers say that their business models contribute to the circular economy by reusing devices, diverting them from landfills.
Capital-lite for everyone?
While low up-front capital costs represent a major advantage of the XaaS model for users, XaaS service providers often face high capital costs, since they need to purchase, produce, or otherwise acquire the equipment ahead of renting it out.
Direct lending from banks may not be the solution. For many SMEs, including startups, securing credit lines directly from banks can be difficult. Traditional working lines with banks are hard to maintain, they create more operational effort, and slow down growth. For banks, there is also greater risk associated with the segment, resulting in higher costs for borrowers.
While the press often places its focus on equity raises by startups from venture capitalists, in the XaaS segment, it is debt financing that’s actually doing much of the heavy lifting. For example, in July 2021, devices-as-a-service company Grover announced that it had secured a $1bn asset-backed facility (debt funding is provided to a special purpose entity which will acquire and own the products Grover’s customers subscribe to). At the same time, Grover also announced that it had secured stage B equity funding worth a total of $100m.
“Debt funds offer small businesses an alternative to classic bank loans, including bespoke financing, speedy deployment, and a flexible approach,” European Investment Fund (EIF) Chief Executive Alain Godard commented following a 20m euro investment in a fintech fund announced last September.
Here at CrossLend, we expect these market activities to grow in scope, creating a range of nuanced investment opportunities, especially opportunities which may appeal to institutional investors.
In areas like infrastructure as a service – solar panels and heating equipment are some examples – the lengthy life of the deployed assets opens the door to long-duration investment opportunities. That makes these the types of deals that will appeal to institutional investors like insurers or pension funds, with long-dated liabilities.
With XaaS often displacing the traditional leasing model – whereby the asset sits on the end user’s balance sheet and they establish a direct relationship with an originator such as bank or specialist financing provider – debt financing can provide an opportunity for banks to gain exposure to the sector, albeit at arm’s length. Debt financing can offer attractive returns but with less compliance work and lower risk capital allocation compared with writing individual loans.
Again, many investment opportunities also have strong ESG credentials, including in areas like mobility, with the electrification of transport, or infrastructure such as solar panels.
Take the example of Bikeleasing-Service GmbH, which provides bike leasing services to companies, which in turn provide electric bikes to their employees, with the same tax advantages that apply to company cars (options are also available for self-employed workers). The use of electric bikes for commuting – and for personal use – is associated with reduction of vehicle fleet emissions.
Working with CrossLend, Bikeleasing’s lease receivables were bundled into a note that received an investment grade rating from Scope Ratings, which also gave a favourable second party opinion on its ESG credentials within the ICMA Green Bond framework. That created an ESG investment with a rating from an external credit assessment institution for MEAG (the asset manager) and ERGO (the investor) while in turn helping the originator grow its business. This is ultimately helping to reduce the use of internal combustion engine vehicles for commuting and other transportation.
Overall, opportunities in debt financing are set to grow, with the expectation that this will become increasingly mainstream, beyond the domain of niche or specialist debt financing funds.